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At first the title of this column might seem a bit strange, but look again. What is the first thing that comes to your mind when you see the title? Keep that thought! 

When we came up with the idea to introduce a column to our website, the subject for the first column was quickly found. Coming up with a good title however was more of a struggle. Should it be something like “Pavlov response triggered by the word royalties”, or something like “Watch out! Do you have an entity in Luxembourg? Then sooner or later you’re going to be accused of misbehavior”. The struggle was ended by my four-year-old daughter. She gave me the inspiration for the title. My daughter is slowly learning to recognize letters. “A” she for example recognizes because it is the first letter of my name. “L” is the first letter of her own name. And “M”? She does not recognize an “M” because it is the first letter of her mommy’s first name. Nor does she recognize the letter “M” because it is in the word “mama”. No, for her the letter “M” stands only for one thing: McDonald’s! And that for a four-year-old girl that in her whole life perhaps visited McDonald’s 4 times. So now back to the subject we chose for this column.


Last week a few organizations including EPSU (European Federation of Public Service Unions) accused McDonald’s of using a tax structure that allowed it to divert revenue for years and by doing so costing European countries over 1 billion Euros in lost taxes between 2009 and 2013. To support its accusations EPSU co-authored a report with EFFAT and SEIU.


I assume the intention of the report is to provide support for the accusations as made by EPSU, EFFAT, SEIU and War on Want. According to these organizations in 2008 and 2009 McDonald’s made two significant changes to its European corporate structure which according to these organizations resulted in the aggressive optimization of McDonald’s’ tax arrangements in Europe. One of the suggestions made by the organizations is that by changing its business structure McDonald’s has saved over a billion Euro in taxes throughout Europe. The question that now comes up is whether the report drafted by EPSU, EFFAT and SEIU is indeed supporting the accusations made?


Let’s start with the question whether we feel it is justified that McDonald’s stores (whether corporate or franchisee) have to pay a license fee to be allowed to use the McDonald’s logo, trademark and get access to McDonald’s’ recipes. First of all I feel that the way my daughter thinks about the letter M, and not even only about the yellow versions, but in all Ms shapes and colors, shows the value of the McDonald’s’ logo. And what about you yourself? Imagine the following scene: together with your family or friends you are travelling to or from holidays. Suitcases in the trunk. Driving over the highway and slowly becoming hungry. How many of you start searching for a yellow M to appear in the distance? I know, I do. And I am not even a regular McDonald’s visitor. So why do I start looking for a yellow M when I am travelling by car? For me the reason is simple. In every country I have been to, the Big Mac looks the same and tastes the same. For me it is therefore clear that the name McDonald’s, the logo and the recipes represent a certain value. So to me it also seems reasonable that both third-party franchisees as well as corporate McDonald’s stores have to reimburse the owner of said IP to be allowed to make use of it.


Unfortunately over the last few years politicians have created an atmosphere in which it seems politically correct to accuse multinationals of using bookkeeping tricks to shift taxable income from country A to country B whenever royalties are being paid. The EPSU report seems to blindly follow this trend. Moreover in my view some of the remarks made in the EPSU report seem to boomerang.


On page 4 of the report for example it is stated: “McDonald’s appears to uniformly charge its European franchisees a royalty fee of five percent of franchisees’ sales. McDonald’s also routinely controls the real estate for its franchised stores, with franchisees paying rent to the company in addition to royalty payments. In some countries in Europe, McDonald’s also extracts royalty payments from its corporate stores, effectively charging its own country-level subsidiaries for the right to operate McDonald’s restaurants.” Assuming that McDonald’s corporate stores and the franchisees both have to pay the same royalty (5% of the sales) the report seems to support that at least in “some” European Countries McDonald’s seems to operate in accordance with the at arm’s length principle.


A second flaw of the report however seems to be that the report suggests that restructuring and the re-routing of the royalty flows to/through Luxembourg has led to the other European countries losing out on taxes.


On page 6 the report the following supposed Pre-2009 European corporate structure and supposed Post-2009 European corporate structure of the McDonald’s Group are described.




Looking at the structures as described in the report, I notice only 1 difference between the pre-2009 and the post-2009 structure. And that is the entity to which the “McDonald’s Subsidiaries in some European countries” pay royalties. In the Pre-2009 structure this seems to have been a Delaware entity, where in the Post-2009 structure this Delaware entity is replaced by a Luxembourg company. Assuming that nothing else changed (e.g. the transfer prices remained the same), in my view the only conclusion has to be that the changing of the structure did not contribute to any base erosion (for (corporate) income/profit taxes) at the level of the local McDonald’s organizations or at the level of the local franchisees. However, it should be noted that the change in structure might have had an impact on the royalty withholding taxes to be withheld over the royalty payments made.


It should also be noted that the Post-2009 structure as included in the EPSU report seems not to be correct/complete. This seems to be confirmed by a remark made on page 8 of the report where it is stated: “When considered in the context of the entire amount of royalties the company receives, McD Europe Franchising Sàrl’s reported taxes are even smaller. The company’s taxable income is reduced by a few significant costs that make up a large proportion of total royalties received. The main costs reported by the company are cost sharing expenses, royalty expenses, and management fees, which are largely intercompany payments.” This remark seems to indicate that Luxembourg obtained a license (from the Delaware entity?), and subsequently grants sub-licenses.


An other remark I would like to make is that the report seems to be inconsistent. Where the report rattles on for pages how bad it is for the other European countries that the royalty payments are re-routed through Luxembourg, on page 14 the following remark is made: 

If McDonald’s had maintained its European headquarters in London and paid U.K. tax on royalties earned from its European subsidiaries, the royalties that have since been received by McD Europe Franchising Sàrl would have been subject to a much higher rate of tax. If all of the royalties actually received by McD Europe Franchising Sàrl between 2009 and 2013 were taxed in the U.K. instead, McDonald’s would have owed up to £818.7 million in tax.


While it is unlikely that McDonald’s would have paid this amount of tax had it maintained its European headquarters in London, these calculations show the potential scale of the impact that McDonald’s decision to relocate to Switzerland has had on the finances of a country which is both one of its largest and most important markets and its former European home.


Here I am completely lost. Is this report sponsored by the UK government? First of all, leaving the European headquarters in the UK in itself would not have led to the royalties ending up in the UK. According to the EPSU report before the restructuring the royalties didn’t end up in the UK either. So for arranging that the royalties would end up in the UK also a restructuring of McDonald’s corporate structure would be necessary. And what is more: to me the remark seems to be inconsistent with everything that was stated on the earlier pages of the report. For the (corporate) income/profit taxes to be paid in Italy, Spain, Germany and the other (European) countries in my view it doesn’t make a difference whether the royalties are paid to a Delaware company, a Luxembourg company or a UK company. 


So is there nothing stated correctly in this EPSU report? It can be, but when a report contains the flaws that I described above, for me this blows away the basis under the whole report. It quickly makes me lose interest and discourages me to spend time to do some research to find out whether there actually is some truth in the report.


Funny however how to see how the media is immediately ready to attract attention to the report. Is it because they love to mention another big corporate name, Luxembourg, tax rulings and royalties in an article? And that then makes me wonder again whether I have chosen the right title for this article? Perhaps it actually had to be: “A Pavlov response to corporate names, Luxembourg and tax rulings”.


For those still interested in reading the EPSU report, click here to be forwarded to the report as published on the EPSU website.



Please note that all of the above is completely based on the data, information and remarks as included/provided by/made in the EPSU report. I did not do any research on the facts as presented in the EPSU report. Nor did I do any research on the corporate structure, the financing structure or the IP structure of the McDonald’s Group.


For other columns click here.


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